Child Care Tax Credits, But Only For Some

Today USA Today had an article in the "money" section that encouraged parents to think about using summer camp expenses to apply for the child and dependent care credit.

This credit allows working parents to claim from 20% to 35% of child care expenses, up to $3,000 a year for one child, or $6,000 for two or more. The actual amount of your credit will depend on your adjusted gross income. If you earn less than $15,000 this year, you can claim up to 35% of child care camp expenses; if you earn more than $43,000, your credit is limited to 20%. A credit is more valuable than a deduction because it represents a dollar-for-dollar reduction in your tax bill. The credit is available for care for children up to age 13.

For families who qualify, the credit is a way to reduce their costs and end up with more money in their pockets. However, not all families get the credit. Low income families who do not make enough to pay taxes get no help with their child care costs--even though they pay the highest percentage of their income on child care of any group. A report from the Urban Institute's Tax Policy Center notes that:

For calendar year 2006, the CDCTC provides tax benefits of approximately $3.3 billion.The majority of the benefits flows to middle- and upper-middle-income households. Taxpayers with incomes between $100,000 and $200,000 receive almost a quarter of the total benefits although those taxpayers represent only 11 percent of all households. Another 40 percent of the benefits go to the 30 percent of households earning between $50,000 and $100,000. Only 8 percent of the benefits go to households with incomes less than $30,000. In percentile terms, the top quintile (or fifth) of income earners receives 41 percent of CDCTC benefits; the bottom 40 percent receives only 4 percent.

The report goes on to note that to make the credit useful to low income families--and to make the credit more progressive--Congress should make it refundable so that even families with no tax liability get help paying for child care. An additional 1.6 million families could benefit.